(Illustration by iStock/Khafizh Amrullah)
Ask if corporations can be an active agent for social good, and many will say yes. But if you ask whether they should be legally compelled to do so, you may get a different answer. After all, can ideals be enforced through legislation? Can laws mandate companies to go above and beyond their fiduciary duties and give back to society as “social” businesses? Is the law even the right vehicle to effect this change? If you frame it this way, it may seem like only two options exist: use laws to force businesses into social impact, or do nothing. Neither is very compelling.
This, however, is a false choice. While social enterprise, social impact, and corporate philanthropy might not be for everyone, we can still use law and policy as a means to encourage companies towards wanting to be more active corporate citizens. The key is remembering that policies and laws aren’t always trying to immediately materialize an ideal society by forcing the necessary actions required to achieve it; the true target can be people’s mindsets. And the law is a good tool in encouraging companies to want to be more active in their social contribution and responsibility. It just needs to be done right.
How, then, should we design laws and policies to encourage greater social consciousness from corporations, without coercion? A variety of countries have attempted this—with varying degrees of success—and what the benefit of hindsight teaches us is that crafting effective legal regimes aimed at corporate social good is a matter of standards, signals, and structures.
Standards. One might expect that legally mandating something is the ultimate form of encouragement. For example, India’s 2013 “Companies Act” required companies above a certain size to spend at least 2 percent of their net profits activities like the eradication of extreme hunger and poverty, promotion of education and gender equality, and many more “CSR” activities. Other countries have also taken this kind of clear legal step (see Nepal and Mauritius, for example). And for the most part, it was effective: one study reported that mean CSR expenditure increased by 9 percent among firms that were already reporting a positive CSR, while firms whose CSR spending was below 2 percent increased their CSR spending from 0.8 percent to 1.5 percent, on average. Charitable private sector spending jumped from 33.67bn rupees in 2013 to around 250bn rupees after the law’s enactment.
However, this isn’t the full story: 52 of the country’s largest 100 companies failed to spend the required 2 percent, while firms that were already spending over 2 percent on CSR activities prior to the law’s enactment actually decreased their CSR spending, from about 2.7 percent to 2.2 percent of net profits on average. The double-edged sword of legal mandates is that while you push everyone to achieve the standard, setting that standard will make it difficult to persuade someone to exceed it. Defining what the “right” amount of generosity is creates no incentive to go above and beyond; it may even convince overachievers that they are doing too much.
In short, inspiring a change in outcomes brings no assurance of changing the underlying desire to do good. If the government simply wants to grow the pool of funds going towards the social good industry, a nationwide target makes that happen quickly. As a means to increase corporate desire to engage in philanthropy and social impact? Not so much.
Signals. The law’s psychological impact can be used to design effective policy. In the United Kingdom, for example, rather than setting quantitative outcomes for corporations, laws tend to focus on signaling the government’s intention to focus on this area. There are countless examples: appointing a CSR Minister in 2002, establishing the “Office of the Third Sector” in 2008, the Mutuals Taskforce was established in 2011 (to drive collaboration with Public Service Mutuals, organizations which have left the public sector but continue to drive public services), the Social Value Act of 2013 (stating that the government would take account of social value when awarding central government contracts), and the Social Value Model of 2020 (a complementary tool for government organisations to actually carry out the expectations set out in the Social Value Act).
None of these laws set direct provisions for companies to do anything. Instead, by looking inwardly at government structures, these law signal—or are taken to indicate—the next big move in society, providing assurance on what the government-backed direction for the country will be. The indirect effects of this have cascaded down throughout the UK’s business landscape. Social Enterprise UK (SEUK) has said that the Social Value Act “mainstream[ed] the idea of maximizing the impact of every pound spent,” and credited the government’s key role in growing awareness and adoption of the idea of social value. Public Service Mutuals represent a whole subsector of social impact organizations, birthed directly from government spinoffs themselves.
Today, the UK boasts one of the most robust and well-defined social enterprise sectors in the world: One in 42 UK businesses is a social enterprise, and the turnover of the sector was approximately £78 billion last financial year, 3.4 percent of GDP. The sector is growing rapidly, with a third of social enterprises under three years old. Even among “traditional” businesses, 28 companies in the FTSE 100 donated a sum equivalent to at least 1 percent of their pre-tax profits in 2023, and the social impact investment market in the UK rose by 18 percent from 2021-2022 and 7 percent from 2022-2023, to a total of £10billion.
Not all this progress is directly attributable to the aforementioned regulations, of course. Yet the UK achieved its robust social enterprise subculture without any explicit laws driving or forcing enterprises to take action in this way. The direction of the law indicates government priorities, which does not go unnoticed in the business world. If the government takes active steps to make regulations facilitate social businesses, or to lead by example, these serve as push factors for the business landscape in recognizing opportunities.
Structures. Beyond indirect signals—that might require a long runway for deep impact—there are also laws that target the structures that facilitate or impede certain directions in an industry. Think of how antitrust and competition laws structure the rules that facilitate certain kinds of business deals, while impeding others; think of how the structures created in Intellectual Property law ease the process of commercializing some technologies while impeding the progress of others.
The same structures exist in business law. Take, for example, the kinds of legal forms through which businesses can incorporate. In the United States, for example, there are sole proprietorships, limited liability companies (LLCs), C-corps, and S-corps; under tax-exempt organizations, section 501(c)(3) provides details on those operating “exclusively for exempt purposes,” which include charitable, religious, scientific and many others. Some states go further in encoding the social enterprise model in law, describing a low-profit limited liability company, or L3C, which is a for-profit that furthers the accomplishment of certain charitable activities (and does not have certain income-producing or property-appreciating purposes). L3Cs have come to be encoded in the laws of over 8 states in the US with over 2,300 corporations registered as of 2022.
It is no coincidence that the most prominent form of corporate altruism in the United States has to do with achieving recognition or status as a “social enterprise,” and that we’ve seen an explosion of accreditation bodies, social enterprise cooperation organizations, and social good metrics as the private market has responded. Take, for example, the Social Enterprise Alliance (a membership organization for social enterprises in the US) or B Lab (which creates the Benefit Corp certification, widely known today for accrediting corporations for meeting high social and environmental standards. Also noteworthy is Ashoka’s funding and sponsoring social entrepreneurs to pursue their social innovation ventures in the US and around the world, and the Better Business Bureau’s encouragement for business to self-regulate in the creation of an “ethical marketplace.”
501(c)(3) tax status and B-Lab Accreditation are entirely distinct things, but the corporate social good movement and the structure of legal identity are deeply intertwined, and the explosion of accreditation bodies in the United States indicates a clear demand within the private sector to receive recognition that one’s organization is social and altruistic. In the world’s most capitalistic economy, there is a desire to blend profit with purpose, and the structures encoded in law have shaped how this desire manifests. In this sense, the existence of legal forms like L3Cs and the tax-exempt status of certain organizations not only provide a framework for social enterprises to operate but create a market response that values accreditation and recognition of social good.
This interplay between legal structures and market behavior illustrates that the way laws define and enable corporate identities can guide industries toward a particular ethos. Beyond imposing obligations or incentives, it’s about creating structures that define a landscape embedding social good as part of business strategy, intertwining economic benefit with social benefit so that profit and purpose no longer contest but complement.
Standards, Signals, Structures
Let’s get creative with how we design policies and not think in rigid binaries. The true target of our policies is not just the corporations’ actual actions, but also the underlying mindsets that drive their actions. The power of a law comes not just from its ability to forcefully coerce, but also in its normative power to indicate a gold standard to strive to, or to manipulate the structures that quietly shape business landscapes in the background, or as a signal of government priorities, implicitly placing emphasis on a direction they want to start heading towards. These subtler, psychological powers are a powerful tool in a legislator’s arsenal.
Read more stories by Gareth Goh.